This is a tale of two companies: one an establishment corporation trying to become entrepreneurial, the other an entrepreneurial start-up seeking to become established. Their battleground ranges from 22,300 miles directly overhead down to the television set in your living room.
Both the Communications Satellite Corp. (Comsat) and New York-based United Satellite Communications Inc. (USCI) are gunning for a share of a market that doesn't yet exist: direct broadcast satellite-to-home (DBS) television. Put a satellite into space and turn it into a super-transmitter to blanket the nation and beam all manner of pay-TV programming into people's homes. Think of it as cable TV without the cable.
Most people--especially the executives at Comsat--didn't expect to see DBS-TV until around 1985 or 1986, after all the regulatory red tape had been snipped and a special breed of satellites launched.
But by exploiting existing satellite capacity, USCI may be able to bring DBS to market in Washington and other parts of the country by next fall. USCI wants to skim the cream off the DBS market and leave Comsat to sell to the dregs. It's turned into a game of corporate chicken with each side claiming the other is doomed. There are some indications, however, that the two antagonists may be talking behind the scenes about getting together.
The story really begins back in 1979 at the World Administrative Radio Conference where the telecommunications community assigned part of the frequency spectrum specifically for DBS use. At the time, satellite-to-home broadcast was seen as cable TV's biggest rival for feeding American TV sets with new programming.
DBS fits into the mix of new media technology as a delivery system in competition with broadcast TV, cable, video-cassettes and videodiscs as a way to get programming to people. Back then, several of the country's heavy hitters in communications, CBS, RCA and Comsat, among others, figured that DBS would be their gateway into the burgeoning pay-TV market.
Comsat, with its special expertise in satellite technology, immediately set to work. In less than a year, it had set up Satellite Television Corp. as its DBS subsidiary. Three months after the Federal Communications Commission opened its DBS inquiry, STC was there with an elaborate set of petitions detailing how its three-channel system would funnel signals into satellite dishes less than three feet in diameter--cozy enough to tuck by an apartment window or a ranch-house chimney.
After both regulatory and congressional hearings on the merits of DBS, STC was granted the first satellite construction permit for a DBS system last September.
The key to DBS is "high-power" satellites: it takes a lot of energy to hurl a TV signal earthward. As a rule of thumb, the more powerful the satellite, the tinier the receiving dish can be. Because DBS satellites will be so powerful--200 watts--the dish can be very small, making unnecessary the existing four-foot and larger dishes needed to pick up signals from low-power 20-to-40 watt satellites.
It turns out, though, that dish technology was improving rapidly. A few people imagined there might be ways to take advantage of existing low-power satellites for creating a DBS television network.
A couple of New York entrepreneurs, Richard Blume and Cliff Friedland, discovered that a Canadian satellite company, TelSat, was going to launch a pair of satellites--the Anik series--that might fit the bill and they teamed up with New York real estate millionaire Francesco Galesi. By last August, the trio persuaded General Instrument Corp., a billion-dollar electronics firm, to buy a 14 percent stake in their fledgling USCI with the understanding that General Instrument would build all those dishes to receive the DBS programming. United Satellite Communications Inc. announced that they'd be into space and on the air by the end of 1983.
Satellite Television Corp., which had promised to invest upwards of $600 million into starting up its DBS system, immediately petitioned the Federal Communications Commission asking it to block USCI's attempted end run to outer space. The commission has thus far declined to act.
As a business, both Satellite Television Corp. and USCI see DBS as an "aftermarket" service targeted to those homes without cable or other forms of pay-TV. That's a market estimated at 30 million households--and if DBS can snag the same sort of subscriber numbers that cable has, it has the potential to reach $2 billion a year in revenues, according to STC estimates Neither company has any desire to go head-to-head with cable TV.
"Where DBS versus cable, cable wins," says Gustave Hauser, former president of Warner-Amex Cable. "Where people have no choice, it's wonderful." He notes with irony that "Cable spent 30 years taking the antenna off the rooftops and DBS puts it back on."
But the market, say several industry analysts, is forbidding. "The economics are tough," says another top cable TV executive. "There's room for only one company. The first one out will cream the market and there won't be much left for the rest. USCI has a better shot by being first than STC, which is more technically proficient."
"USCI's lead time could be very, very valuable to them," says Jack Cottle, of the Denver-based communications consulting firm of Brown, Bortz and Coddington. "If USCI goes as planned, by 1989-90 they should have about 5.4 million subscribers."
It comes down to who can deliver what and when, and will people want to buy it? Will TV viewers wait for a two-foot dish from STC in two years when they can have a four-foot USCI dish now? Will people settle for adequate rather than superior technical quality? What kind of programming will the competitors offer? These questions frame the future of DBS. And everybody in the industry stresses that people buy for the programming, not the technology that delivers it.
"The easiest way to contrast the companies is to look at the profile of the people," says Nathaniel Kwit, USCI's president. Kwit, a former president of MGM/United Artists, has assembled a management team from the top ranks of the pay-TV industry. Morton Fink, who used to head Warner Communications Home Video unit, is USCI's executive vice president; Dave Gordon, who was with ON-TV, one of Chicago's over-the-air pay-TV services, is handling marketing. Clearly, Kwit's USCI is built around programming and programmers.
USCI will offer five channels of programming, says Kwit. Two channels, which USCI will program itself, will be similar to the HBO and Showtime movie channels; the third will feature sports--either ESPN or Sportschannel (which is 50 percent owned by the Washington Post Co.); another channel will be all-news with Ted Turner's CNN or Group W/ABC's Satellite NewsChannel; and the fifth channel will provide "narrowcast" programming tailored to specific audience segments.
Pending a scheduled June launch of the first Anik satellite on the space shuttle Challenger, USCI plans to premiere sometime in the fall with Washington as one of the target cities. A USCI customer is expected to pay between $400 and $500 for a dish roughly four feet in diameter and approximately $20 a month to subscribe to the service. Kwit expects "several hundred thousand" subscribers by the end of 1984.
The logistics of providing all that, however, are complex. Dishes must be built, delivered, distributed, installed and maintained. Billing and collection systems must be devised and video piracy discouraged. USCI has yet to set up the structures to do all of that. The company is reportedly negotiating with cable franchises to distribute and install dishes in areas where cable doesn't yet serve or would find it uneconomical to wire. But no deals have been signed.
USCI is also exploring the SMATV--Small Master Antenna--market that serves apartment complexes by wiring all the apartments to a central satellite dish. Initially, Kwit said, USCI will aggressively sell to anyone and everyone who will buy. He says he may then bias the company to favor whichever revenue stream is thickest, he said.
A more serious concern is that USCI initially will broadcast from the Canadian Anik satellite and then switch later to a different satellite system. That would require re-aiming all the existing dishes so they could capture the signals broadcast by the new satellites. That would be very expensive and has led some observers to speculate that USCI will wait until the later system is launched before going on the air.
Kwit denies this and a broadcast executive who asked not to be identified agrees. "Their whole strategy is predicated on being first. The hare, once out of the starting blocks, is not about to be caught napping."
Richard Bodman, the Princeton engineer who is president of Comsat's STC subsidiary takes all of this in stride. "What we're planning on doing is offering the lowest cost system to the public anywhere, and it doesn't have to have an ugly antenna on the roof," he says, referring to USCI's larger receiving dishes.
What bothers the media industry about STC's proposal is that the company has virtually no broadcast entertainment expertise. "They don't have any marketing sense or programming sense," says one cable TV executive.
"You have to separate what we have been versus what we are," counters Bodman. What STC does not have, it can acquire, he asserts. Bodman says STC is close to hiring several of the broadcast industry's top programming experts. More important, STC may even seek out a partner to share the costs of start-up, pool expertise and, they hope, split the profits, says Bodman. Several years ago, a partnership deal Comsat had been negotiating with Sears, Roebuck & Co. fell through. Today, STC reportedly is looking for a company like American Express to joint-venture into DBS.
Like USCI, Bodman expects STC's initial programming to be along the lines of HBO movie packages appealing to mass audiences. But, he says, "We're not sure what the big-ticket program winners will be in 1986."
Bodman's expectations for DBS appear to revolve around its technical potential. "I see us starting out providing entertainment," he says, "and then moving into information services that link DBS to personal computers" for the distribution of such things as video games and computer data.
The critical distinction that Bodman emphasizes, though, is that STC will provide a basically superior system to what USCI can offer. When people see what STC TV looks like, he asserts, USCI's dishes will tumble like dominos. However, that can't happen until STC becomes operational.
Both publicly and privately, the two companies are critical of one another. STC ridicules USCI's Hollywood style, while USCI and its allies say STC's stress on technical quality totally misses the point of the entertainment business.
Ironically, says one senior broadcast executive who has dealt with both, the two may be getting together. "They are in the early discussion phase," he asserts, "seeing if Comsat could in some way become part of USCI. In 1986, a switch over to the STC satellite would occur" if a merger of some kind came about. If that happened, USCI would become an interim DBS provider and transfer onto the technically superior STC system when it finally goes into service. This way STC and USCI both could hedge their bets and spread the risks.
On the surface, at least, this appears logical. However, an STC spokesperson calls the report that the two companies are talking "totally, totally outlandish."
The stakes and the risks involved are tremendous. If USCI should fly on schedule, says the Yankee Group, a Cambridge, Mass., consulting firm, and Comsat sticks to its original plan, "DBS may become Comsat's own corporate Vietnam." According to several industry analysts, an unsuccessful foray into DBS by STC with the resulting financial strain could put parent Comsat's fiscal health in jeopardy.